When word came down that the ACLU was suing Morgan Stanley because of allegations of racial discrimination in its subprime mortgage loans, this writer dug through the computer in search of an old loan application template from the days of being a loan officer. And guess what? There’s no check box for one’s race. So how can Morgan Stanley – or any lender – discriminate because of one’s race? Even more puzzling is the fact states and even the federal government have sued lenders in the past too for for discrimination against minority borrowers.
The suit was filed the U.S. District Court in New York and this is the first suit of this kind that includes “lending discrimination”. Another interesting twist is the fact this is the first case of its kind that goes after the investment bank instead of the lender. This fact makes the case even more puzzling since the investment banks likely never saw any of the paperwork associated with the actual loans; they bought the “paper”, but it’s doubtful anyone on this level went to any kind of lengths to seek out the race and other information that would identify the homeowners’ sex, religion or other “no-no’s” associated with discrimination. In fact, these types of loans are often “bundled” together and converted into mortgage backed securities that are sold to pension funds and others.
The case has its roots in Detroit and includes five Detroit residents who are seeking class action status. This could become extraordinarily problematic for a sector that’s known for its colossal errors in judgment. If granted, it opens the door for countless others who are looking for way to even the score.
It’s important to remember, too, that if these were subprime loans, there’s a good chance that had the market dynamics not been perfectly aligned, these one-time homeowners likely never would have been able to buy a home at that time. While no one is doubting the lack of good judgment in those cases, at some point, homeowners could have refinanced those homes for better rates had the recession not kicked in and annihilated families across the country. You can be sure those tough economic times affected every race in the U.S.
The executive director for ACLU, Anthony Romero, said,
With this lawsuit, real victims of the subprime lending scandal are stepping forward to hold investment banks like Morgan Stanley accountable for the devastation the banks wrought in their lives and in our economy.
What Romero is failing to see is that “real victims” are found in every income bracket, every race and every city. To single out a race(s) for inclusion in the suit feels sort of, well, racist.
For its part, Morgan Stanley says it intends to fight this suit “vigorously”.
In 2007, the Wall Street Journal published “The United States of Subprime”. What it found was interesting:
The Journal’s findings reveal that the subprime aftermath is hurting a far broader array of Americans than many realize, cutting across differences in income, race and geography. From investors hoping to strike it rich by speculating on condominiums to the working poor chasing the home ownership dream, subprime loans burrowed into the heart of the American financial system – and now are bringing deepening woe.
Now, though, with this ACLU lawsuit, it’s almost guaranteed that these types of lawsuits will be peppering courtrooms across the nation. Even Romero says it’s expected. He says “similar suits against other firms could be forthcoming”.
The real question is when will these subprime borrowers take responsibility? After all, home ownership is something we all aim for in the U.S. Many took risks during the housing boom because it was so easy to garner approval. There were even “stated” loans where the lenders didn’t require the mortgage brokers to verify income, employment or much else. A rock bottom credit score, an “estimated” debt to income ratio and boom – you’re a homeowner. ACLU doesn’t mention these facts, but in the suit, it does say that Morgan Stanley “ramped up its funding of subprime and other high-risk mortgages, becoming the principal financing source”. It also names one failed subprime lender, New Century Mortgage Co. Indeed, it was a sure thing to work for or get approval for a home via this lender. New Century was one of the first subprime lenders to file bankruptcy, too. That stands to reason since New Century was probably the one bank that simply did not care about the risk; the bottom lines were impressive for awhile, but it had nothing to do with the caution in lending standards it competitors incorporated.
So what happens now and will this and what are sure to be other lawsuits cause any significant problems? It’s hard to tell, but this is definitely one of those cases where we’re all rooting for the good guy to win – and for the ACLU to file a racial discrimination lawsuit against lenders and funding sources based on race is, at its core, ridiculous.